How IR35 will affect contractor’s roles in engineering and IT

by Heat Recruitment

In February 2018, IR35 hit the headlines when HM Revenue & Customs ruled that former BBC presenter Christina Ackroyd was liable for a tax bill of up to £420,000 since she was operating as a full-time employee despite engaging the corporation via a limited company. The ruling brought the issue to the fore and sparked speculation amongst business owners and contractors alike.

Eight months later, chancellor Phillip Hammond put an end to the rumours with the revelation of the government’s plans to crack down on people working ‘off payroll’ in the private sector.

Introduced to combat tax avoidance, the Intermediaries Legislation (IR35) is designed to determine whether a non-payroll worker is a bona fide contractor or a ‘disguised employee’ of the company.  At present, the IR35 applies to contractors working in the public sector as per the changes set out in 2017. However, as part of the autumn budget, the same legislation will soon see contractors in the private sector bound by the same rules. This revelation wasn’t exactly welcomed with open arms, and it’s because of this that plans won’t be introduced until 2020. The government have allowed for a two year consultancy period to ensure the sector is ready when changes take effect.

From the date of entry, every medium and large private sector firm in the country will be responsible for determining the tax status of any contractor they engage.  Rather than the contractor determining whether their contract is inside of the IR35 legislation, the responsibility will fall to the company supplying the contract. Consequently, it will be the company engaging the contractor who will face a fine in the event that they set the wrong tax status.

Naturally, the decision to extend the tax rules to the private sector was met with concern by firms in the engineering space, where a shortfall of skills sees the majority of firms struggle to recruit the right talent to their business. Considering the growing demand for experienced IT and engineering professionals, companies seeking to keep up in a dynamic, fast-changing landscape are increasingly turning to contractors to help implement new technology-led solutions including big data and IoT.

At a time of rapid technological advancement, it’s unlikely that the change to the rules will cause private sector firms to turn away from the self-employed workforce. According to figures from a recent study, 41% of technology employers are planning to engage contractors in the coming year, a 6% rise from last year. Of those planning to enlist contractors, 65% say the motivation is to meet peaks in demand, while 26% are looking to self-employed candidates for a cost-effective, flexible solution to staffing.

While a number of studies have shown the drop in the number of available contracts since the IR35 legislation was rolled out to the public sector in 2017, they further indicate an increase in contract workers raising their fees to counter the hit from the fall in opportunities. IR35 further benefits contractors insofar as their liability associated with an incorrect determination sits primarily with the employer. This could inspire firms providing their self-employed IT and engineering staff with more clearly defined contracts that outline the parameters of the legal working relationship on paper.

The changes may not be immediate, but IT and engineering contractors seeking clarity should take the time to understand how the legislation works and how it might shape their careers, while businesses planning to engage contractors must put in place appropriate actions to ensure that the new rules can be applied when April 2020 comes around.

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by Mike Taylor and Chris Reid